Energy shock tests central banks

Today, oil prices surge through $110 a barrel after a strike on Iran's major gas field.

Plus, the bed keeps interest rate steady, but Marcus detects the hawkish tilt.

And the central bank parade continues today with the BOE, ECB, and BOJ.

This is Reuters Morning Bid, where you unfiltered market news and analysis

straight from the Reuters newsroom seven days a week. I'm Anastomansky and London.

And I'm Mike Dolan. It's Thursday, March 19th.

Well, Mike, normally the morning after a Fed decision,

that would be our major topic of discussion. But I think yet again, really what we have to talk

about most are oil prices. Yeah, I mean, I think probably last night, Chairman Jerome Powell

put it best when he says nobody knows really how this conflict is going to pan out.

And of course, it by extension, the energy price impact and the inflation implications of that.

And you could see after he spoke just how uncertain the battlefield as it were,

actually, is. And so this big strike on one of the biggest gas fields in the world,

the South Powers field in Iran is a dramatic escalation of the energy infrastructure part of

this conflict and an even President Trump. Very quickly, afterwards saying this was a very angry

lash out by the Israeli forces suggesting that he wasn't fully across plans to do that.

But then doubled down on it and said if there was big retaliation, the United States would get

involved in bombing that area too. Straight afterwards, Iran retaliates and hits Qatar's major

natural gas energy facilities as well. So we really have seen this going to new territory.

I think it's fair to say. Yes, I mean, I think with some exceptions up until now,

the US and the Israelis have mostly tried to avoid attacking Iran's energy infrastructure

for the simple fact that if a new government were to come in, then you would want them to be able

to have a source of revenue. So this definitely does show that we are entering a new stage.

It also simply suggests that this is not going to be ending quickly. And you know,

something we have to discuss before is that the markets up until now and you could even argue now

still seem fundamentally to be pricing in at least the paper markets seem to be pricing in a

relatively swift conclusion to this conflict and the idea that you're not going to have lasting

scars. And I think that that might be a little overly optimistic. Well, I think that optimism

may be shifting as well this morning because we're seeing Brent Crude, global benchmark for crude oil,

push above 115 dollars a barrel as we speak. And it's a natural gas prices, which are obviously

very sensitive in Europe are pushing I think about 6% higher as well this morning. So the market

is beginning to see this as a potential new leg in the energy shock, such as the we're dealing

with it. And it is affecting all central banks. And again, as we said, the Fed last night trying

to give us some indication of where monetary policy would be for the rest remainder of the year,

but really admitting that it doesn't know. And of course, the Fed didn't change rates yesterday,

which was widely expected. So essentially, everyone wanted to see where they going to shift their

expectations. And they didn't, in some sense, their inflation expectations, a really short-term

inflation expectations did shift. Though policy wise, it's there's still mostly anticipating one cut

this year. And markets really aren't so sure about that though. Yeah, I mean, there was three takeaways

for me from the meeting. There was no change, Kerry, but the, as we mentioned, that powers

insistence that all of those projections, including the inflation projections and the so-called

dot for the policy rate over the course of the year, that nobody really knows. He effectively

said that you could rip all those up because things are changing so fast. The other thing he

concentrated on, or the other point around that was the, even though the Fed left one cut in,

that median forecast, there was seven Fed members, so no further cuts this year. That's a very large

split in the policy-making council. And one member saw the next move as a hike in 2027. So

there's already a very significant degree of hawkishness within the Fed. For all the focus

there is on the Trump appointed doves, there is a big opposition to going down that road.

Certainly. I also think it was notable that if you listen closely to Powell's language too,

previously he had said that almost that, you know, it was no one's baseline that there was

going to be a hike that this really wasn't under discussion. And that shifted. He said the vast

majority, it was not the baseline, which definitely does suggest that we are moving in a little

bit more of a hawkish direction, which is obviously going to make for a very difficult environment

for Kevin Warsch, the nominee for Fedger, if in fact he does take over in mid-May. And so the Fed

is not the only central bank meeting this week, far from it. We had the BOJ this morning. Again,

policy was unchanged. We have the ECB. We have the BOE. I think again, we're probably going to get

not a lot of actual policy shifts, but some interesting communications given this environment,

given this energy shock. Yeah, look, they're all in the same boat on one level in a sense.

None of them, much like the Fed, really knows what happens next in terms of energy prices.

But they are at different point of their own cycles. So we had up until very recently, at least,

expected a bank of England cut as soon as this week. And that's almost certainly not going to

happen. They want to obviously see how things play out over the coming weeks and months.

The ECB, on the other hand, was in its happy place. It was not minded to do anything. And of course,

markets now are thinking that it's going to have to lean towards a potential interest rate hike.

And in Japan, there's a similar story. Actually, they left rates unchanged, but of course,

there's a lot of pressure there for them to push up interest rates. So the overall picture of

all the central banks is certainly one where the whole easing cycle we've had for the last

year or two has come to an end. And we are possibly now looking at the next hikes whenever that may be.

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For today's recommended read, check out Mike's column and why investors have been reluctant to

unload stocks and bonds amid all the geopolitical turbulence. The link is in the show notes.

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